Makhlouf asserts his independence with criticism of Donohoe’s budgetary strategy

Central Bank governor warns Government of ‘damaging imbalances in the economy’

Central Bank governor Gabriel Makhlouf poured a bucket of very cold water on things. Photograph: Dara Mac Dónaill

If there was an air of optimism around on Wednesday morning as people digested the Government's plan to remove almost all remaining Covid-19 restrictions over the next seven weeks, Gabriel Makhlouf poured a bucket of very cold water on things.

The Central Bank of Ireland governor used the second anniversary of his taking on the role to share his thoughts on the budgetary path of Paschal Donohoe, the Minister that appointed him, and assert his independence.

He did not mince his words.

In Makhlouf’s pre-budget letter to the Minister last year, he said that the spike in Government borrowing in order to deal with the economic fallout from Covid-19 was welcome. But he warned that it would quickly become necessary to reduce the debt ratio from the very high levels reached during the crisis to put the public finances on a firmer footing and give it room for manoeuvre in the event of another future shock.


In this year’s letter, dated July 30th but only published on Wednesday, the governor takes aim at how his previous advice has fallen on deaf ears.


The Government’s recent Summer Economic Statement (SES) lays out a plan for a series of budget deficits, resulting in a €7.4 billion planned gap – to be filled by additional borrowing – by 2025. It’s €6.6 billion more than the original target set out three months earlier and will leave Government debt at 106 per cent of the size of the domestic economy, and among the highest in the developed world.

While the SES contains a pledge to only borrowing for capital investment from 2023, Makhlouf warns that even with this commitment, "there is a risk that higher Government spending and tax changes – as well as resulting higher debt – could generate excessive inflationary pressures, leading to the emergence of damaging imbalances in the economy".

Current forecasts for strong economic growth – with Davy forecasting recently that Irish gross domestic product will surge by 10 per cent this year – will only make things more precarious. Sobering thoughts as the Government prepares to unveil its Housing for All plan today, including a ramp-up in the delivery of social housing "on a scale", as Minister for Housing Darragh O'Brien put it last week, "never seen before".